Interest Rates Remain Constant… for now
June 19, 2019 has been marked on the calendar of many investors for quite some time, as they look to predict the future of the markets and the overall US economy. This is the day when the Federal Reserve announced the newest interest rates. Interest rates directly relate to consumer spending, which in turn affects the revenues that businesses can accumulate. On June 19th, the Federal Reserve announced that they will not be changing their interest rates for the time being. However, there are many economic indicators that suggest that a dip in interest rates is on the horizon.
In early May, the odds of a decline in interest rates were close to 20%. At the beginning of the month, a drop in interest rates was seen as an even tossup. At the time the announcement was made, investors viewed a drop to be 50% likely, demonstrating that such a drop is probable soon. Many Wall Street investors look to these changes when making their investment decisions. The market has seen a slight decline since speculation of lower interest rates has grown (Phillips).
The phrase ‘history repeats itself’ is very important when discussing the current state of our economy. The economy has seen gradual upslope for the past ten years, and historically, this pace cannot continue. An economic slowdown is in the midst. Since the Great Recession, however, the Fed has attempted to announce their intentions much more clearly than in the past. Many speculate that the economic disasters of 2008 were, in part, due to the fact that the Federal Reserve was very private in their decisions. Once decisions were made, it came as a shock to some investors which led to a decline. Trade wars, plateau of the market, and reduced employment numbers are all indicators that the economic boom may be coming to an end. A decrease of interest rates would also signal that a slowdown is near. If the Fed decides to pull the trigger and decrease these rates (which many speculate) it will be interesting to see the effect this has on the state of the economy.
The trade war is being seen as a serious threat to the stability of our nation’s interest rates. Trump has drawn out this dispute in an attempt for global supremacy over China. He plans to establish more American production, but this will only occur if he can restrict the Chinese from shipping their goods at discounted prices. Trump threatened China with a 25% trade tariff if they did not end their dispute by the end of June. Many believe that a resolution between President Trump and President Xi will mediate the need to cut interest rates. Tim Duy, economist out of University of Oregon, has a different opinion on the relationship between these two variables. He tweeted, “I think they [Federal Reserve] cut even with a G20 deal. They really entrenched rate cut expectations today and can easily justify pulling back the December rate hike. Beyond that, the trade deal/data matter.” He believes that the Fed will decrease rates regardless of what happens between the US and China (Newmyer).
The inclination to overreact is a very common theme to those that deal with finance. Chairman of the Federal Reserve, Jerome Powell, is asking that we don’t jump to conclusions before drastic measures are taken. He stated, “It’s important that monetary policy not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook.” The saying, “if it’s not broke, don’t fix it”, comes into play in this case. Powell wants to make sure that the speculation does not lead to unnecessary decisions that will end up creating more harm than good (Horsley).
The threat of an interest rate cut doesn’t mean bad news for all investors. There is always at least one group that benefits through every transaction made. When talk that the interest rates would be cut intensified, the price of gold shot to record 5-year highs. When interest rates are lowered, the rate of return comes down with it, making investments in gold a smarter play for long term investors. Over the long term, the investment of gold is worth more than the potential 2% that bonds can dip too. If lower interest rates are officially announced by the Fed, look for the price of gold to skyrocket in price (NBC).
In the upcoming weeks, it will be interesting to see what unfolds in the economic state of the country. Will Presidents Trump and Xi settle their disputes to avoid excessive tariffs? Will the Federal Reserve decrease interest rates? These are all questions that will be answered in a short period of time. The answers to these questions will help to form the economic makeup for the rest of 2019 and beyond. Anyone interested in investing and the economy of the United States should stay updated on the reports that may come out on this news.
Horsley, Scott. “Fed Leaves Interest Rates Unchanged For Now, Cites Economic 'Uncertainties'.” NPR, NPR, 19 June 2019, www.npr.org/2019/06/19/734016930/fed-ponders-when-to-cut-interest-rates.
NBC. “Gold Soars to 5-Year Peak as US Fed Signals Rate Cut.” CNBC, CNBC, 20 June 2019, www.cnbc.com/2019/06/20/gold-market-the-fed-us-10-year-treasury-in-focus.html.
Newmyer, Tory. “The Finance 202: Fed May Lower Interest Rates, Citing Trump's Trade War as a Threat.” The Washington Post, WP Company, 20 June 2019, www.washingtonpost.com/news/powerpost/paloma/the-finance-202/2019/06/20/the-finance-202-fed-may-lower-interest-rates-citing-trump-s-trade-war-as-a-threat/
Phillips, Matt. “Wall Street Pins Its Hopes on Fed Rate Cuts.” The New York Times, The New York Times, 3 June 2019, www.nytimes.com/2019/06/03/business/fed-interest-rates-wall-street.html.